NEW YORK (TheStreet) -- This is a big week for big oil, with the three mega-cap oil companies, ExxonMobil (XOM), Chevron (CVX) and ConocoPhillips (COP) all set to report. It promises to be a very, very good quarter for the trio.It will come as no surprise to anyone who's had to fill a tank of a car with gasoline recently that big oil is enjoying some very high crude and gas prices. It will also come as no surprise that big prices equate to some big profits for big oil. The market hasn't been surprised: As oil has risen over the past year, so have the stocks of the big integrated oil players. We can see this close correlation in the relationship between oil and the SPDR Energy Select ETF ( XLE): in the last 12 months, oil is up 46% with the XLE up a similar 42% (see chart below). Even with the healthy rise in oil prices in the last several months, expectations for 2011 first-quarter profits are not at their most heady in history: Consensus profits for Exxon, for example, are for $9.8 billion for this quarter just past, while they earned $11.68 billion and a whopping $14.83 billion in the second and third quarters of 2008, respectively. Where the big surprise will be is clearly on profits from downstream earnings, from the refining divisions of these three. Here, the disconnect between U.S.-priced crude oil, represented on the New York Mercantile Exchange as West Texas Intermediate, and virtually all other grades of oil that refineries use has meant a very, very healthy margin on refining of gasoline, heating oil and other liquids. Downstream profits like these have not been seen for the big oil producers since 2006, and for the most part are going to be unexpected by the analysts and the street. While Exxon is looking for $2.01 a share of earnings and Chevron is expected to earn $2.98 a share, I expect those numbers to be significantly higher based on downstream surprises -- perhaps as much as 30 cents more a share. You'll get a bump in stock price from these earning surprises, to be sure -- but oil is already so high, and these big oil stocks are as well -- so I wouldn't be recommending any new positions in these shares right now.
I wouldn't recommend selling them either, although a good surprise from these two this week would be an excellent opportunity to at least play a little defense, by either lightening up on a long position or by selling in-the-money or slightly out of the money covered calls on a portion of the position. You see, while earnings are the thing going on this week that will immediately affect these shares, the Fed is the other thing going on this week that will ultimately be the arbiter of share prices down the road -- any indication of an end of QE2 without subsequent easing in June would have far bigger effect than any earnings surprise. And I am expecting at least a slowdown in oil's price and in these big integrated shares very soon -- no matter what the Fed signals. This may be the best year to apply the old maxim to "sell in May and go away." The opportunities in these shares are not entirely over, but the need for protection looms strongly.